TAKING A LODGER? DON’T FORGET TO CLAIM “RENT A ROOM” RELIEF

HMRC are carrying out a review of rent a room relief to discover whether the scheme, introduced back in 1992 provides the right incentives for the rental market. The current scheme exempts from tax, gross rents up to £7,500 where rooms within the taxpayer’s main residence are rented out.

Most accountants that responded to the call for evidence were keen for the relief to continue as it encourages taxpayers to let out spare rooms and provides them with additional income.

Note that where the gross rental income exceeds £7,500, say £12,000, the excess of £4,500 would be taxable. Alternatively the taxpayer may deduct costs of providing the living accommodation such as a proportion of mortgage interest and light and heat. If these allowable expenses amounted to £9,000 then it would be more appropriate to be taxed on the net rental profit of £3,000.

Note also that the current scheme only provides relief where the rooms let are in the taxpayer’s main residence and if the property is jointly owned, the relief would be £3,750 each. Where the lettings are in another property, the new £1,000 property allowance could be set against the gross rental income, however this allowance applies to each taxpayer.

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Annual Tax on Enveloped Dwellings (ATED)

There are a number of changes which will impact the returns for the 2018-2019 period to cover the ATED year which runs from 1 April to 31 March.

Every dwelling owned by a non-natural person (a company, a partnership with a company member, or a collective investment scheme) at 31 March 2017 MUST be revalued at 1 April 2017. Therefore, a property that was valued at say, £400,000 in 2012 may have been outside of the scope until now, however, if the taxable value is more than £500,000 on 1 April 2017, or at acquisition if that was later than 1 April 2017, then it will be subject to ATED.

1 April 2017 brought about the first 5-yearly revaluation date for ATED and this revaluation will be needed for 2018-2019.  There are reliefs and a relief declaration return would be completed where applicable.

The ATED is calculated using a banding system.  The annual chargeable amount for 2018-2019 has also risen to £3,600 (up from £3,500) for dwellings ranging from £500,001 to £1m.

From 1 April 2018, all online ATED returns must be filed using HMRC’s new ATED digital service. The new online service before the 2018-19 filing window opens on 1 April 2018. The online service can be used for both chargeable returns and relief declaration returns.

It’s worth noting that a return must be filed by 30 April for that year if the property was held on 1 April.

Divorce and property

For example;  As part of the divorce settlement, it has been agreed that you will transfer your share of the marital home to your wife once she has raised the finance to buy you out. This might take long time, or you may have to sell the house.  How can this affect your PPR claim?

Normal PPR relief would allow you to relieve the gain on the sale of this property, which had been your residence, for the period that you actually lived there and the last 18 months for any other reason. Depending on when your ex-wife manages to raise the finance this later period of absence may well be covered by these basic rules.

However, TCGA 1992 s225B legislates for the right to receive PPR on disposals in connection with the end of a marriage or civil partnership, where a partner ceases to live with their spouse or civil partner in what was their only or main residence. This gives you some leeway in that you can still be classed as accruing, and so make a claim for, PPR on the ex-marital home that you no longer live in due to the separation. There are no time limits given in the legislation for how long this PPR can accrue but conditions have to be met.

One of the conditions is that your disposal is part of the agreement on dissolution or annulment of the marriage or civil partnership, where separation is likely to be permanent or by order of the court.

Another condition is that your previous partner must also have this property as their only or main residence from the period that you move out to when you transfer your interest to them. This is also a key point that sometimes gets missed when the house is put up for sale and sold to a third party. To enable this claim, if you do decide to put the house on the market, you must transfer your share to your ex-wife before it is sold to a third party. Otherwise, you fail as you haven’t transferred your share to your ex-partner who is still living in the house.

The other pitfall is electing another property as your main residence in the period between moving out and transferring your interest to your ex-wife. If you buy a main residence in the interim you may fail the claim under s225B.

SDLT Transfers to Limited Companies

Holding a buy to let property via a limited company can be an attractive way of holding property.  Lower rates of corporation tax and full mortgage interest deductions apply following the changes to interest relief for individual landlords.

There have been changes to stamp duty land tax and as such it has become an area that should be given more than a mere thought.  Here we are looking at the SDLT implications of property transfers in England, Northern Ireland, and Wales.  Transfers of property in Scotland will be subject to land and buildings transaction tax, and from 1 April 2018, property transfers in Wales will be subject to the land transaction tax.

Where an individual is transferring a property to a connected limited company the following should be considered:

  • The consideration is deemed to have been payable at no less than the market value of the property. The SDLT cannot be reduced if the transfer is for nil consideration or at less than market value.  There are no rules relating to gifts etc.
  • The additional rates of 3% will apply to all residential property acquisitions made by companies.
  • If the transfer to a company comprises a mixed-use property i.e. residential and commercial, then the mixed-used rates apply.
  • If two or more properties are transferred to a company, then it may be possible to make a claim for multiple dwellings relief. This relief calculates the SDLT payable by reference to the average value of the properties transferred.
  • The higher SDLT rate of 15% applies where a company acquires a single dwelling interest valued over £500,000 unless for qualifying business purposes. Relief is available where the properties are held as a buy to let investments though further SDLT may become due if there is a change of use within three years.

Based on the above a thorough review of the SDLT implications should be made before any legal or beneficial transfers of property take place as transactions of this nature can deliver surprising results!

First time buyer relief

First Time Buyer Relief was introduced by the Chancellor on 22nd November 2017 and applies to all relevant transactions provided the effective date of the transaction is on or after that date.

The purchase must be of a single dwelling.

The relevant consideration must not be more than £500,000 and on a dwelling purchased by a first-time buyer intending to occupy the dwelling as the main residence or as the only residence.

There must be no linked transactions (Other than the purchase of a garden or grounds that subsist for the benefit of the dwelling).

A first-time buyer is an individual who has never previously acquired a major interest in a dwelling (or an equivalent interest in land) situated anywhere in the world. Such an interest could be acquired by inheritance or gift.  It does not apply to acquisition as a Trustee.  If the property is owned jointly, all of the purchasers must meet all of the conditions.

The effective date of the transaction is normally completion but can be earlier if the transaction has been substantially performed before that date.  For example, the buyer taking possession or the vendor receiving 90% of the sale proceeds.

The effect of the relief depends on the relevant consideration.

Up to £300,000,  no Stamp Duty Land Tax is payable.  For acquisitions over £300,000 and up to £500,000, Stamp Duty Land Tax is payable at 5% on the surplus over £300,000.

The relief must be claimed on a land transaction return using code 32 in the appropriate field of the return.

Helping first-time buyers!

 

In an attempt to help first-time buyers get on the property ladder and stimulate the housing market the chancellor announced that for property purchases completed on or after 22 November 2017 there would be no SDLT payable if the purchase price is below £300,000.

This will be a permanent measure rather than a temporary holiday. Those claiming the relief will pay no SDLT on the first £300,000 of the consideration and 5% on any remainder. No relief will be available where the total consideration is more than £500,000. It should be noted that where a property is bought in joint names it must be the first property owned by all purchasers.

 

Transferring property and VAT implications

For example… A client’s company runs a garage and car showroom from a property it bought five years ago for £300,000 + VAT. We had checked at the time that the seller had opted to tax so we were satisfied that it was correct to be charged VAT, and the client recovered the input tax. The director has been reviewing his pension arrangements and would like to transfer the property into his SIPP. What are the VAT implications if he does this?

When the building was bought by the company there was an option to tax in place, made by the seller. A point that is often misunderstood is that an option to tax does not transfer across with the property and therefore, in the client’s hands, supplies of the property would be exempt. However, if the company were to sell the property to the SIPP exempt this would lead to an unwelcome outcome.

As the company occupied the building to make taxable supplies as a garage and car dealer it was entitled to recover the VAT of £60,000 on the purchase; there was no need to make an option to tax at this stage.  However, unknowingly, it has a VAT issue known as the Capital Goods Scheme (CGS) to consider, meaning that the use of the property has to be monitored for ten years, and adjustments made if the balance between taxable and exempt use alters.

The CGS applies to capital expenditure on an interest in land or buildings with a value of £250,000 or more (exclusive of VAT) which was subject to VAT at the standard or reduced rate.  It also applies to alterations, extensions and annexes to buildings, and to capital expenditure on services, and goods affixed to the building in the course of refurbishing or fitting out a building. Detailed guidance on the CGS can be found in Notice 706/2.

Adjustments under the CGS would be triggered if the sale to the pension fund were now an exempt supply; meaning, for your client, a potential repayment of 40-50% of the VAT already recovered (because the remaining complete years of the ten year term would all be considered to be for exempt use).

The solution is for the client’s company to make its own option to tax on the property by completing a VAT1614A to notify HMRC before selling to the SIPP in order to make the property a taxable supply. This means that VAT will be charged on the sale, as well as ensuring there is no liability to repay any input tax.

If the SIPP intends to let the property back to the company for a commercial rent it should ensure that it too is VAT registered with its own option to tax in place prior to its purchase as there is another common pitfall to avoid.  There is no pre-registration input tax recovery on a CGS item, meaning that if it were to be incurred prior to the SIPP registering it would need to be claimed by the SIPP over the ten years of the CGS.

Just on a topical note, the Office of Tax Simplification in its recent report suggested that the threshold for the CGS could be increased, as it has been set at its current level since the inception of the scheme in 1990 and property values have risen significantly since then bringing far more into the CGS scope. Whether HMRC act on this remains to be seen.